IBM Hardware Slide Drags Down Q3 Results

IBM on Wednesday reported yet another quarter of declining revenues as the company has struggled this year to overcome the one-two punch of falling hardware sales and currency headwinds.

IBM's Software and Global Business Services unit results were flat for the third quarter ended in September. But the Systems and Technology unit, which makes server and storage hardware, reported a sales decline of 16.6% year-over-year to $3.2 billion. Hardware accounts for approximately 16% of IBM's total revenues.

IBM's large Global Technology Services unit, which handles long-term outsourcing deals and accounts for approximately 40%, reported a 4.3% year-over-year decline in revenue to $9.5 billion.

Total company revenues on the quarter were down 4.1% from the previous year to $23.7 billion.

IBM's System Z mainframe business increased 6% over the quarter the year before, so the Systems and Technology shortfall was attributable to a 38% decline in Power System revenue, an 18% drop in System X (x86) revenue and an 11% slide in System Storage revenue.

IBM CFO Mark Loughridge said the company is taking action to stabilize the hardware business by moving Power Systems servers into the Linux market, but that has yet to offset slowing demand for Unix servers based on Power. HP and Oracle have also reported steep declines in Unix server sales.

China was a leading cause of IBM's hardware and total revenue shortfall. Sales in China were down 15%, and 40% of total sales in that country are tied to hardware. Loughridge said state-owned enterprises in China are holding back, awaiting economic reforms that won't be in place for two more quarters.

The federal government shut-down in the U.S. will not have a major impact on IBM's fourth-quarter results, Loughridge predicted, unless it wears on into December. Federal government spending accounts for only 3% of IBM's revenue, he said.

Cloud revenue was a bright spot for IBM, with the company surpassing $1 billion in quarterly cloud revenue for the first time. The performance was attributed in part to the acquisition of Softlayer, which brought incremental new business that would not have otherwise gone to IBM.

Loughridge said $610 million in cloud revenue was tied to cloud-related hardware, software and implementation services while $460 million came from cloud-delivered services and solutions including Softlayer.

IBM's longstanding goal is to reach $7 billion in annual cloud revenue by 2015. It has also promised investors it will reach $20 billion in annual overall profits by 2015. But Loughridge said IBM must stabilize the profitability of its hardware business in 2014 in order to reach that goal.

IBM leaked word of a personnel shuffle to Wall Street Journal on Thursday http://on.wsj.com/19UIAtR, but it sounds like more rearranging of deck chairs. This unit not doing well? Get a new exec. That unit not doing well? Get a new exec. "Look, Wall Street, we're doing something about it!"

This feels more like a shift in the IT market than an one- or two-department execution issue. HP and Oracle are struggling with the same tepid demand. Unix servers aren't coming back. Linux servers won't cover the gap. Those big old databases are too slow to implement/change and too expensive. IT budgets aren't getting any bigger, so companies are experimenting with open source and new platforms and tools that weren't invented by or acquired by the old guard in IT.